Question: The Imperial Socket Company has a subsidiary in Brazil. At present, the subsidiary offers its customers terms of 2 / 10, net 60. The Brazilian operation has been under pressure to extend the terms granted to its customers in order to meet the competition. After an appraisal of the situation, the company believes that the demand for its product is not very sensitive to price. A proposal by the Brazilian executive states that prices could be increased by 10 percent if terms of 1/30, net 90 were offered, with overall sales unaffected by these changes. At present, 80 percent of the customers take advantage of the full credit period offered. On the remaining 20 percent of sales, any cash discounts offered are taken. These proportions are expected to remain the same if the new credit terms were implemented. Sales average $300,000 per month. All receivables are financed through the local bank, where financing is available at 20-percent annual interest. Past experience has shown that 1.5 percent of sales that do not avail themselves of the cash discount are written off as bad debts. The corporate tax rate is 40 percent.
(a) Should the company introduce the proposal suggested by the Brazilian executive?
(b) Are there other factors to be considered before implementing such a change?